Successful financial management is a vital part of any growing business. It allows a company to spot red flags before they become significant, reducing the business's financial risk. Financial management is the process of monitoring the money going in and coming out of your business, ensuring compliance with regulations.

Financial management is essentially a health check-up for your business, allowing your company to spot cash flow bottlenecks before they become an overwhelming problem.

In this guide, you'll learn what financial management is; the key components, goals, types of financial management you should know about when it comes to your business, and why financial management is so important as your business scales.  

Table of Contents

• What is financial management?
• Why is financial management critical?
• Key components of financial management
• Goals of financial management
• Types of financial management
• Manage your finances with QuickBooks
• FAQ

What is financial management?

Financial management is the practice of monitoring finances to improve business performance. Successful financial management ensures a company can see the big picture, plan for new purchases, and catch problems before they create serious business risk.

For example, an Ontario-based manufacturer is considering expanding by opening a facility in British Columbia. To make this a reality, the CFO should analyze projected cash flows and evaluate potential risks to determine the best way to proceed with the expansion.

A few of the things they might need to consider include capital outlay for the new facility, expected operating costs, and compliance requirements in BC. 

Why is financial management critical?

Managing multiple departments, locations, and revenue streams is complicated. Strong financial management enables more control over multiplying data. A structured financial management process helps maintain control over cash flow and capital allocation, avoid operational inefficiencies, and manage business growth effectively.

There are also many short- and long-term benefits to financial management:

Short-term benefits

In the short term, financial management allows scaling businesses to ensure departments are meeting their financial obligations, such as paying for operating expenses.

By keeping track of finances, the CFO can make sure you're in compliance with any industry regulations as well as provincial and federal tax laws. By monitoring finances regularly, a growing business has the opportunity to make changes like reducing expenses or evaluating operation efficiency from month to month.

Long-term benefits

In the long term, financial management allows the CFO to see how a company's financial statements compare to those of the competition. It allows for the opportunity to improve profitability, plan for growth through investment and expansion decisions, and reduce the business's exposure to financial risk.

Key components of financial management

There are several key components of financial management practices, but the most common include:

• Planning
• Budgeting
• Risk assessment
• Decision-making

Planning

The planning side of financial management involves looking at the strategic long-term financial goals of a company and determining how to reach them. Forecasts are a big part of planning because they are used to estimate revenue and expenses for the upcoming months or years.

Using multiple forecasts and scenario analyzes allows a company to see where revenue may end up short or expenses may be too high. This information can help mid-sized businesses plan for diverse market conditions such as economic downturns or sudden market expansions.

For example, a software firm in Toronto plans to expand internationally in the next five years. The finance team can provide long-term forecasts with scenario analyzes based on various market entry strategies, foreign exchange fluctuations, and regulatory requirements. Comparing these forecasts and scenarios can help the firm accurately project costs and predict profitability so they can allocate resources appropriately to optimize outcomes.

Budgeting

With expanding businesses, budgeting needs to go beyond short-term project planning to cover detailed variance analysis. This type of analysis allows the finance team to see discrepancies between budgeted and actual costs so they can respond with corrective action.

In order to grow over time, the finance team should constantly be monitoring financial statements to evaluate and improve on business performance during each month, quarter, and year.

Example: a restaurant chain operating multiple locations must create detailed monthly budgets for each location, considering things like inventory, labour, and marketing. A monthly budget analysis will quickly highlight locations with higher food wastage or labour costs. Operational adjustments, such as reallocating resources or renegotiating supplier contracts, can be made based on these insights.

Risk assessment

Risk assessment involves identifying risks, implementing controls to mitigate those risks, stress-testing various scenarios, and preparing detailed contingency plans. Depending on the industry, risks can include economic downturns, mismanagement of resources, operating inefficiencies, and non-compliance.

• Diverse Nature of Risks and Controllability: Risks can vary widely, ranging from operational inefficiencies (which are often easier to manage) to external factors like market fluctuations or regulatory changes. Internal threats like fraud also need consideration.
• Strategies for Risk Mitigation: Companies can reduce their exposure to risks through various methods, including purchasing business insurance, establishing strong internal controls, optimizing operations, and diversifying income sources (as illustrated by the automotive parts manufacturer's focus on supplier disruptions and financial controls).

Decision-making

One of the most popular uses of financial management is using financial data to make decisions. The most effective decisions require timely and accurate financial information. These types of decisions often involve significant capital investment and require detailed financial analyzes to properly assess alternatives.

Analyzing financial data will help determine the best course of action.

For example, a logistics company with a fleet of over 100 vehicles is trying to decide if they should expand. The CFO can use financial analyzes to determine if purchasing or leasing the vehicles is the better option. This would involve considering not just the lease or purchase costs, but also the cash flow projections, tax implications, depreciation, and return on investment.

Goals of financial management

When it comes to financial management, goals can include maintaining liquidity and cash flow stability, maximizing profit and minimizing costs, complying with regulations in your industry and the government (such as provincial sales tax and GST), and maintaining growth and long-term stability.

Liquidity and cash flow control

Cash flow is critical in any scaling business. Without it, operation capacity and growth opportunities can be severely limited. The liquidity of a business shows how likely it is that there's enough cash to cover operating expenses and any unexpected costs. Monitoring the money flowing in and out of a business will provide this information.

Liquidity ratios such as the current ratio (current assets/current liabilities) or the quick ratio ([current assets-inventory]/current liabilities) are helpful in evaluating liquidity. Evaluate the cash conversion cycle using calculations such as inventory turnover, accounts receivable turnover, and accounts payable turnover.

Profitability and cost management

To improve a business's financial performance, the primary goals are to:

• Maximize profitability and minimize costs. This requires regular monitoring of sales and expenses, and making necessary adjustments. Accurate financial reporting is crucial for understanding how costs affect the bottom line and allows for strategic improvements.
• Identify financial trends through regular reporting. Preparing financial statements like income statements and balance sheets enables the finance team to compare performance over different periods and calculate key profitability metrics (gross, operating, and net profit margins).
• Analyze performance through benchmarking. Comparing financial data over multiple periods (monthly, quarterly, or annually) and against industry standards or competitors provides valuable insights.

Compliance with regulatory standards

Financial management helps businesses stay on track with regulations in their industry as well as federal and provincial tax laws. Many goods and some services are subject to provincial and federal sales taxes. Monitoring sales of these good and services ensures your company is keeping close track of how much sales tax will need to be remitted to the government.

Some mid-sized businesses must follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) when preparing their financial statements. Depending on the structure of the business, corporate tax returns may also be required.

Sustainable growth and scalability

One of the most important goals of financial management is business stability.

To ensure a business succeeds over the long term, it's important to routinely track financial data and adjust the business plan as necessary.

Pro Tip: QuickBooks Online Advanced can help manage even the most sophisticated business finance needs. It includes sophisticated reporting tools that allow for insightful, customized reports; multi-user access to financial data; and streamlined, automated processes that grow as the business grows.

Types of financial management

Financial management serves a different function depending on which data is being analyzed. The main types of financial management are:

• Capital structure
• Capital budgeting
• Working capital management
• Financial reporting

Capital structure

Capital structure refers to how a business finances its operations and growth. Determining an optimal mix of debt and equity is key because this balance influences financial stability, cash flow, and control over business decisions.

Debt is money borrowed from a bank or other lender. Debt financing can provide flexibility, immediate capital, and ownership control, but repayment obligations need to be managed carefully.

Equity is funds already in the business or funds raised from issuing shares (in the case of a corporation). This type of financing doesn't need to be paid back, but there are other obligations that come with it, such as bringing on additional shareholders who may have a say in how the company is run.

Investors often have voting rights and can influence business decisions. For mid-sized businesses, a blend of debt and equity financing may be optimal to maintain flexibility, ownership control, and growth opportunities.

Capital budgeting

Capital budgeting involves identifying, evaluating, selecting, and implementing the best investments for your business. Investments aren't always financial. They can also be projects, such as expanding the business, and asset purchases such as new equipment.

By analyzing the financial data in terms of return on investment (ROI), net present value (NPV), discounted cash flow (DCF), and internal rate of return (IRR), capital budgeting can help mid-sized businesses determine which investments make the most sense.

Financial ratios like these show how long it will take an investment to make its money back. This can help a business identify which investments would be the best use of cash.

Working capital management

Working capital management determines how well your current assets such as cash, accounts receivable, and inventory are covering your current liabilities (accounts payable and short-term loans). By monitoring your business's working capital ratio, you can avoid cash shortages and having to take on more debt.

To calculate working capital, add current assets like cash, inventory, and accounts receivable, then divide by the total of all current liabilities such as accounts payable. Working capital ratios vary among industries, but a working capital ratio of less than one indicates your business's current assets aren't enough to cover its current liabilities.

Tools like QuickBooks Online Advanced provide an automated invoicing system that can track accounts receivable efficiently. When receivables stretch beyond typical terms (say 30 days), the finance team can implement automated reminder notifications to reduce late payments and improve liquidity.

Financial reporting

Financial reporting involves presenting the data collected on income and expenses in a format like an income statement to make it easier to identify key performance indicators (KPIs) such as net profit, gross profit margin, ROI, inventory turnover, and return on equity.

Calculating KPIs — and then comparing them to industry averages or the business's performance during a prior period — can give the finance team a clear picture of the business's financial health. These KPIs can provide further information than financial data alone.

For example, inventory turnover (calculated as cost of goods sold divided by the average inventory for a given period) can tell a company how many times they sell their entire inventory in that period. This allows for successful planning of stock orders. 

Manage your finances with QuickBooks

As your business scales, successful financial management should be just as easy as it was when you were a new business owner running everything on your own.

QuickBooks Online Advanced is made for growing businesses, with features like inventory tracking and analyzing project profitability to allow for streamlined financial management.

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